Firms buy talent in tight labor market

Analysts say the labor market is near full employment with the jobless rate at a 16-year low of 4.2 percent. That’s pushing wages up to an increase of 2.5 percent over last year, the largest gain since first quarter 2015.

A tightening labor market means continued good news for mergers and acquisitions. According to M&A Market Pulse data recently released by Pepperdine University, the International Business Brokers Association and M&A Source, more than half (55 percent) of advisers surveyed expect the shrinking labor market will drive businesses to expand through acquisition.

I always thought it was interesting to read about these big Silicon Valley firms that would buy small development companies for pretty much the sole purpose of bringing on the talent. Known as aqui-hiring, these firms would often shelve whatever the acquisition-target was working on and shift developers to their own projects.

But now with the labor market continuing to contract, we’re seeing this trend expand beyond Silicon Valley to Midwest manufacturing, service industries and others around the country. Firms are having a tougher time growing organically because they don’t have the people to lead new divisions or staff expansion.

Meanwhile, we’re sitting in a marketplace with low-interest rates and banks eager to lend. It’s a prime time for companies to shift to an acquisition model to enhance their top and bottom line.

We just saw this play out in one of our own deals, having recently completed the sale of a business doing around $30 million in revenues. Initially, the owner was looking to sell his top performing division and carry on as usual with the rest of the operation. But the winning buyer put together a strong offer and deal structure that encouraged the business owner to not only stay, but to roll over equity into the new company.

The buyer saw, early on, that they wanted the seller and the talent on his team. They knew the only way to do that was to buy 100 percent of the business. We had other offers to buy just the leading division, but our winning buyer decided they weren’t going to compete for that. They wanted all or nothing, because they wanted the people resources.

As the buyer told me, “We have a good team, but when you add the seller’s team to ours, we’ll be the rock stars of the industry.”

I recently spoke to one of the buyer’s key people, and he tells me they’re very excited about the future. The seller is satisfied, too. He no longer has to deal with issues like HR, warehousing and financial oversight, but can focus on what he likes to do best. What’s more, he stands to gain even more when it’s time to sell his equity stake in this expanded “rock star” operation.